MAR 4602 FNU Fossil Fuel and Alternative Sources of Energy Research Paper

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The group project research papers (20-25 pages in length, double-spaced)

All papers must be in Times Roman 12, one-sided and pages numbered.

In terms of format, you must consult the APA Style Manual or the Chicago Manual of Style in preparing your group project paper.

A list of references and in-text citations and/or footnotes should be incorporated in the group project paper.

To assist you in doing an excellent job in your research, two FIU Library websites will prove invaluable to you are: A-Z List (this is the link for all of the business databases FIU has available) and Library Guide (this includes the tabs for different types of information needs, including company information).

OUTLINE TO FOLLOW FOR GROUP PROJECT PAPERS

I.Introduction to the Topic

II.Background/Overview

III.Statement of the Challenges, Problems or Opportunities

IV.Analysis

V.Findings

VI.Conclusion/Recommendations

VII.References

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Page |2 Acquisitions in Global Business: Formulas for Success and Case Examples Turki Basfar, Jennifer Diaz, Tatiana Kasimtseva, Ademuyiwa Ogunseye, & Fabio Toledo Group 5 Florida International University Page |3 TABLE OF CONTENTS INTRODUCTION……………………………………………………………………….5 FORCES AND FACTORS THAT DRIVE ACQUISITIONS.......................................5 I NEED HEADERS FROM TATIANA (4-5) PRE- AND POST- ACQUISITION STAGES……………………..………………….18 PRE- ACQUISITION PROCESSES THE PREPARATION OF QUESTIONS IDENTIFYING THE PROSPECTIVE COMPANY COMMUNICATION WITH POTENTIAL COMPANY PERFORM DUE DILIGENCE FINAL VERDICT POST- ACQUISITION PROCESSES RECOGNIZE THE NEW VISION DETERMINATION OF VISION PROPER ELECTION OF NEW LEADERSHIP MEASURE SUCCESS ROLE OF HUMAN RESOURCE MANAGEMENT……………………...…………24 INCOMPATIBLE CULTURES (SPRINT-NEXTEL) LOSS OF KEY TALENT CLASH OF MANAGEMENT STYLES HUMAN RESOURCE MANAGEMENT GUIDELINES CASE EXAMPLES……………………………………………………………….….....29 ALCATEL-LUCENT HP-COMPAQ DELTA-NORTHWEST AIRLINES TATA BUYS LANDROVER AND JAGUAR EXXON-MOBILE CONCLUSION……………………………………………………………….………….41 Page |4 Abstract Economists and venture capitalists are predicting an increase in mergers and acquisitions as the global economy recovers from the worst recession since the Great Depression (Tepedino & Watkins, 2010). Considering the importance of this topic, our group’s research paper will focus on presenting the underlying reasoning and decision making that business use in deciding when it is prudent to acquire or merge with another company. We will also present our findings on what we have found to be successful strategies for planning, executing, and then managing a new acquisition in the post-acquisition phase (e.g. the importance of retraining and managing new employees via a prepared HR department). We will present this information by referencing several case examples such as; Alcatel-Lucent, HP-Compaq, Sprint-Nextel, Delta-Northwest, Exxon-mobile, and Tata's acquisitions of Jaguar and Range Rover. Finally, we will conclude by examining the individual lessons learned from each case examples and presenting our list of recommendations for success. Keywords: Acquisition, merger, human resources, success, drivers Page |5 Acquisitions in Global Business: Formulas for Success and Case Examples Introduction Companies wishing to expand into new product lines (or improve existing ones), develop new markets, or acquire technology often choose to forgo the necessary costly investments in time and research needed to do so. Instead it is often wiser for a business to acquire (or merge with) another business in order to assimilate new products, markets, or technology without the need of developing it from scratch. However this process is not always easy or successful, and managers need to be aware of the risks and opportunities of acquisitions, as well as the various tactics for success. Large and rapidly expanding companies with access to plenty of cash are often at the forefront of frequent acquisitions in order to expand and maintain an edge in technology and market share. Mergers are often the result of two (relatively) equally sized companies that wish to combine their respective departments and optimize their overall capabilities (eliminating useless or redundant departments). Forces and Factors That Drive Acquisitions Overall business growth is generally pursued through "organic" or internal way or through external way by acquiring companies. The first way is the usual way where company sets goals on increasing productivity, broadening customer base and improving marketing strategies. But when the company is seeking to enter new markets or gain international operations it seems decision makers choose to acquire smaller companies in the targeted market. Smaller companies in face of troubled economy are looking to exit the market; therefore Page |6 presenting an opportunity for stronger well-managed and well-capitalized companies to grow sales and market presence. In the United States of America business is being judged to be successful if it is constantly growing and yielding high returns on investment. "American companies constantly search for ways to improve their operations. Surveys suggest that companies are constantly undertaking programs, initiatives, or projects to improve organizational performance. This validates the premise that companies are willing to undergo the turbulence of change in search of improved performance, profits, and worker motivation" (Frank, 1997). "With attractive lending rates and a soft economy, stable businesses with plenty of cash on hand are finding growth opportunities through businesses open to making a deal. "When interest rates are low, companies with cash look to deploy it in profitable ways," said Brian Jacobsen, chief portfolio strategist for Wells Fargo Advantage Funds and an associate professor of economics for Wisconsin Lutheran College. "Since it is a low-economic growth environment, one way to do it is to buy a competitor … If you cannot build your customer base organically, through economic growth, you can try to buy them." The number of 2010 acquisitions is on pace to be the busiest since the recent peak of 10,572 deals in 2007. "Things are getting somewhat back to normal," said Franklin Allen, finance professor at the Wharton School. The companies are jumping in acquisition deals because they are: • Buying growth: Companies see acquisitions as a quick way to boost their revenue, said Robert Maltbie of Singular Research. Large companies can use cash, which is returning next-to-nothing or borrow at 3 percent or 4 percent after taxes and boost their growth and profitability, he said. • Eyeing international expansion: Not only are U.S companies looking outside the U.S., but foreign companies want a piece of the U.S., too. Foreign companies have bid $99.8 Page |7 billion for U.S. companies this year, 17 percent of total U.S. mergers and acquisitions, said Richard Peterson of Standard & Poor's. That's up 51 percent from last year. • Finding they can do the deals: Investment banks are eager to help companies that have been waiting for the right time to buy rivals, said Sara Moeller, a business professor at the University of Pittsburgh. Companies and their bankers are "hungry and ready to do deals," she said."(Avila, 2010) "Although the broad M&A market remains sluggish, dealmakers say that acquisition drivers are building up in a number of industries. The market downturn has forced many companies to put their acquisition plans on hold. But as economic conditions improve, many analysts think that M&A will pick up in sectors where strategic drivers are compelling and in industries that historically have been hot beds of merger action but where consolidation hasn't fully played out. Few experts anticipate a deluge of activity like that of several years ago, but when some degree of certainty and stability returns to the market, they predict that such industries as banking, pharmaceuticals, and building products will lead the M&A rebound. Without pointing to any specific sectors, Steven Bernard, director of M&A research at Robert VV Baird & Co., says he expects that the M&A rebound will be led by industries where: there are products that people understand; companies have been able to maintain market share in both good and bad times; companies have weathered the economic downturn relatively well; and companies still have predictable cash flows and good margins. "These are the characteristics that will attract more capital and as a result will generate more M&A activity," he says (Harrison, 2003, p. 16-17). Mergers & Acquisition Drivers Page |8 The will power to engage in a radical change, such as the restructure of an organization and its operations, are fueled by the following: • Size matters: most deals are driven by the desire of management to gain more market presence. These acquisitions increase influence through size and market share, tempered by the regulatory constraints of monopoly rules and regulations. • Increase in efficiency from M&A deal described by the equation 2 + 2 = 5; so the value of the newly merged firm is greater than the combined value of the individual firms prior to the merger. • Improvement in managerial efficiency. This means that the buying company has better management and will integrate its tactics in acquired company If this could be true, then the merger increases. • Operating synergies happen if deals are done to achieve economies of scale where size matters or economies of scope where the efficiencies come from allocating expenses over a wider variety of activities. Mergers of scale and scope must be carefully constructed so as not to grow to a size where there are diseconomies of scale and scope; where the company becomes top heavy and inefficient. Increase in revenues should not be overlooked though some managers mainly concentrate on cost reductions. Economies of scale help achieve efficiency in areas such as human resource management, information systems, operations, research and marketing. M&A build a bigger, stronger business, that has greater cash flow, is more likely to attract talent, will increase the number of investors, will be able to invest more in training its personnel, in marketing, in product Page |9 development/enhancement or in expensive capital equipment, has the strength to weather financial storms, is in a better diversification position. For example former Newell Corp., now Newell Rubbermaid Inc., used acquisitions as the way to grow and scale up. The evolution of Newell is a dramatic example of both the success a company can achieve by using acquisitive growth to establish a new way of doing business. Newell was founded in 1902 as a curtain rod manufacturer. By the early 1970s, it was still a relatively small company with less than $100 million in revenues. But company executives had been observing the growing dominance of large, concentrated retailers such as Kmart Corp. and Wal-Mart Stores Inc. The giant retailers were selling billions of dollars worth of merchandise supplied by myriad small manufacturers with only a few million dollars in revenue. But the proliferation of small suppliers posed logistics headaches and quality problems for the retailers. And the small companies often lacked the resources to improve their offerings or fill gaps in their product lines. Newell executives reasoned that big-box retailers would welcome a low-cost supplier large enough to meet them on their own terms - a company that could simplify purchasing and logistics, provide consistently high-quality products, and offer lower prices. So Newell set out to become a one-stop shop for mega-retailers. Over the next 25 years, Newell made some 100 acquisitions. At first, the acquisitions were quite small: suppliers of hardware and household products such as door handles, paint rollers and brushes, and metal cookware, all with revenues between $5 million and $15 million. But as the company grew, Newell was in a position to pull off progressively larger deals - most dramatically, its $340 million acquisition in 1987 of Anchor Hocking, a company whose sales of $760 million were nearly twice those of Newell at the time (Cools, King, & Neenan, 2004) P a g e | 10 Other rationales to establish economies of scope are: to share financial, banking, technical resources; to exchange managers, knowledge; to create cross opportunities for business; and to combine marketing costs. Also, cost cutting has been a motive for engaging in acquisitions and has helped establish new standards today. Being efficient is also one of the most sought after goals and it becomes a heavy driver for acquisitions. Reducing duplicate costs is far and away the greatest advantage of mergers. Furthermore, combining the development costs of management information system, databases, software systems, and other technologies are forces that drive acquisitions. Consolidating insurance policies and affording higher deductibles, since with the growth of company's net revenues insurance premiums are declining and eliminating redundant costs, such as executive suites, financial departments and human resources department savings (Zofnass, 1998, p. 80-83). Rationalization "There is nothing new or counter-productive about multi-brands operating in their own way under the umbrella of one group name. But as Hickey explains it is important to have a centralized system supporting these companies. "You have all these company names operating within Lighthouse Group but behind the curtain we have rationalised our service so that there is one rather than four compliance departments and two income collection systems rather than four. In effect the front house is bespoke but behind the curtain is a joined up system." (Miller, 2000, 17(13), 31) • Financial synergies arise if the internal capital market of the newly established firm is considered more efficient than getting capital externally, as well as increased debt capacity with lower premiums though credit rating usually decrease right after M&A takes place due to uncertainty. P a g e | 11 • The strategic response to a changing external environment: may be due to product life cycles or product/service replacement example of pharmaceutical industry with ever expiring patents. • Individual companies may be undervalued as a standalone company, • Diversification. Company would undergo turbulent change - merger or acquisition in need to diversify. For example "Inter-public Group is eyeing acquisitions in the digital and mobile space in a bid to build its Media Brands operation into a diversified services offering for Asia-Pacific. On a recent visit to the region, Nick Brien, president and chief executive officer of Media Brands Worldwide, said the company would take advantage of the acquisition bargains in the current global downturn to strengthen its technology processes to service key clients, such as Microsoft The challenge is to grow our diversified communications offering - online, shopper marketing, branded content. Where we can partner with existing IPG companies, we will do so. Where we can't, we will acquire. I'm meeting with a mobility company on this visit. Digital acquisitions will play a critical role in areas where we need to strengthen Media Brands." (Santos, Errunza, Miller, 2008, 32(12), 2716) • Managerialism , personal and corporate ego. Managers are interested in size increase as Big always associates with bigger and do deals to increase the company size and therefore their personal power, compensation and so on. • Tax considerations: in some mergers there may be tax-minimizing opportunities (Harrison,2003) P a g e | 12 To round it up companies are driven by opportunities to acquire necessary capabilities rather than wait to develop those capabilities internally. “Since the mid-1980s, for example, Cisco Systems Inc. has acquired some 82 companies to establish its dominant position in the data networking industry. Even with the massive declines in market value incurred by Cisco in the aftermath of the late 1990s boom, the company had an average annual TSR of 28.2% during the 10 years of our study and outperformed the S&P 500 by nearly 18 percentage points. In the fast-moving data networking business, intelligent acquisition is the most effective way to keep pace with technological innovation. In effect, acquisition has become an integral part of Cisco's R&D strategy. More than half of the firm's acquisitions were made either to expand its offerings or to enhance the functionality of its current offerings. Cisco has developed extremely effective capabilities in target search and selection, negotiation, and rapid integration. The company is extremely thorough in its search process. On average, it considers three potential markets for everyone it actually enters and assesses five to 10 candidates for every deal it consummates. Cisco's experienced M&A team works well under highly stressful conditions and keeps the company one step ahead of investment bankers in spotting opportunities and getting deals done.”(Cools, King, 2004) Among many drivers that stimulate company's growth specifically through acquisition one driver we can point out as the overhead is that the more the companies consolidate in one particular sector the harder it becomes for "a little guy" for a smaller company to enter and to P a g e | 13 survive in such market. So the Big continue to get Bigger, increasing the percentage of industry revenues going to the main players Acquisitions are the strategic buys that strengthen and enhance parent company. Experts performed the study on "the valuation effects of corporate international diversification by examining cross-border mergers and acquisitions of US acquirers over the period 1990-2000. We find that, on average, acquisitions of "fairly valued" foreign business units do not lead to value discounts. In contrast, unrelated cross-border acquisitions result in a significant diversification discount of about 24% after accounting for the valuation of foreign targets. Furthermore, significant wealth gains accrue to foreign target shareholders regardless of the type of acquisition. Overall, our results suggest that international diversification does not destroy value while industrial diversification leads to discounts even after controlling for the pre-acquisition value of the target." (Santos, Errunza, Miller, 2008).”According to FMI senior vice president Hugh Rice at FMI's recent Construction Executives Forum, the new merger and acquisition drivers are banking, bonding, and insurance, as well as the lack of public-market interest in contracting firms.” (Sikora, 2002, 3-6.) "Organizations are looking for ways to create more intelligent networks of business partners, customers and suppliers in order to enhance efficiency and profitability. These interactions are increasing dramatically due to the proliferation of electronic business transactions, from banks exchanging transaction data and manufacturers sourcing raw materials electronically, to retailers automating stock replenishment and managing orders online. For example IBM announced the closing of its acquisition of Sterling Commerce. The company expands IBM's ability to help clients accelerate their interactions with customers, partners and suppliers through dynamic business networks using either on-premise or cloud delivery models."(IBM press release;2010) But many call this growth strategy a high risk one. Nowadays a lot of companies are in distress due to volatile stock markets, paralyzed bank lending, downturn in economy and decreased P a g e | 14 consumer spending. Within the Acquisition markets buyers and sellers are reevaluating the prices and the opportunities, since even highly discounted businesses are too risky to buy."Some M&A failures have been dramatic. The AOL/Time Warner deal lost 93% of its value during the integration period as the internet service provider merged with the publishing company in an attempt to combine content with delivery. VeriSign, another internet-related services company, lost $17 billion of its $20 billion acquisition of Network Solutions in 2000, and its stock fell 98%.” (Bryan, Farrell, 2008) In summary, companies are driven by opportunities to acquiring necessary capabilities rather than wait to develop those capabilities internally. “Since the mid-1980s, for example, Cisco Systems Inc. has acquired some 82 companies to establish its dominant position in the data networking industry. Even with the massive declines in market value incurred by Cisco in the aftermath of the late 1990s boom, the company had an average annual TSR of 28.2% during the 10 years of our study and outperformed the S&P 500 by nearly 18 percentage points. In the fast-moving data networking business, intelligent acquisition is the most effective way to keep pace with technological innovation. In effect, acquisition has become an integral part of Cisco's R&D strategy. More than half of the firm's acquisitions were made either to expand its offerings or to enhance the functionality of its current offerings. Cisco has developed extremely effective capabilities in target search and selection, negotiation, and rapid integration. The company is extremely thorough in its search process. On average, it considers three potential markets for everyone it actually enters and assesses five to P a g e | 15 10 candidates for every deal it consummates. Cisco's experienced M&A team works well under highly stressful conditions and keeps the company one step ahead of investment bankers in spotting opportunities and getting deals done.”(Cools, King, 2004) Among many drivers that stimulate company's growth specifically through acquisition one driver we can point out as the overhead is that the more the companies consolidate in one particular sector the harder it becomes for "a little guy" for a smaller company to enter and to survive in such market. So the Big continue to get Bigger, increasing the percentage of industry revenues going to the main players Acquisitions are the strategic buys that strengthen and enhance parent company. Experts performed the study on "the valuation effects of corporate international diversification by examining cross-border mergers and acquisitions of US acquirers over the period 1990-2000. We find that, on average, acquisitions of "fairly valued" foreign business units do not lead to value discounts. In contrast, unrelated cross-border acquisitions result in a significant diversification discount of about 24% after accounting for the valuation of foreign targets. Furthermore, significant wealth gains accrue to foreign target shareholders regardless of the type of acquisition. Overall, our results suggest that international diversification does not destroy value while industrial diversification leads to discounts even after controlling for the pre-acquisition value of the target." (Santos, Errunza, & Miller, 2008, p. 2716). According to FMI senior vice president Hugh Rice at FMI's recent Construction Executives Forum, the new merger and acquisition drivers are banking, bonding, and insurance, as well as the lack of public-market interest in contracting firms. (Sikora, 2002, p. 3-6.) P a g e | 16 "Organizations are looking for ways to create more intelligent networks of business partners, customers and suppliers in order to enhance efficiency and profitability. These interactions are increasing dramatically due to the proliferation of electronic business transactions, from banks exchanging transaction data and manufacturers sourcing raw materials electronically, to retailers automating stock replenishment and managing orders online. For example IBM announced the closing of its acquisition of Sterling Commerce. The company expands IBM's ability to help clients accelerate their interactions with customers, partners and suppliers through dynamic business networks using either on-premise or cloud delivery models."(IBM, 2010) PARA. # But many call this growth strategy a high risk one. Nowadays a lot of companies are in distress due to volatile stock markets, paralyzed bank lending, downturn in economy and decreased consumer spending. Within the Acquisition markets buyers and sellers are reevaluating the prices and the opportunities, since even highly discounted businesses are too risky to buy. "Some M&A failures have been dramatic. The AOL/Time Warner deal lost 93% of its value during the integration period as the internet service provider merged with the publishing company in an attempt to combine content with delivery. VeriSign, another internet-related services company, lost $17 billion of its $20 billion acquisition of Network Solutions in 2000, and its stock fell 98%” (Bryan & Farrell, 2008). Now that we have established the factors and forces that drive companies to acquire other companies, we must now look at how these companies structure their intentions before and after their acquisitions1. What Winning Companies do in the Pre- and Post-Acquisition Stages to Ensure Success 1 “Conceding a conceptual distinction between the terms ‘mergers’ and ‘acquisitions’, in this paper, we will use the term ‘acquisitions’ synonymously for the term ‘mergers and acquisitions (M&As)’. In fact, business practice has shown that ‘the number of “real” mergers is so low that, for practical purposes, ‘M&As’ basically mean ‘acquisitions’” (Rottig, 2007, p. 114) P a g e | 17 In the 2008 acquisition of Danger Inc. by Microsoft Corporation, the entity responsible for the integration was The AK Group (“Helping Microsoft Acquire Danger, without danger,” n.d.). Danger Inc. was the development group responsible for the creation of T-Mobile’s Sidekick series. Of key consultant in the Microsoft-Danger acquisition was Mark Spickett, who at that time had eight years plus an additional four-and-a-half years of experience in management consulting and Microsoft Venture Integration respectively (“Helping Microsoft Acquire Danger, without danger”, n.d.). With success in managing 14 previous acquisitions of Microsoft, Spickett successfully integrated Danger and its 300 plus employees into Microsoft once again. How? Spickett said “I project manage the pre-acquisition, due diligence, close and integration processes" (“Helping Microsoft Acquire Danger, without danger,” n.d., para. 2). He explains further that he got involved "...in the detail of how and when we integrated the businesses and the overall management of the pre and post integration process once the letter of intent was signed" (“Helping Microsoft Acquire Danger, without danger,” n.d., para. 2). Pre Acquisition Processes In the pre acquisition phase, in order to ensure success, the acquiring firm can act on the following procedures as documented by Lieber & Chase (2010): The preparation of Questions: According to Lieber & Chase (2010), the process of gearing for a successful acquisition begins by posing clear, concise, and articulate questions to board and senior staff members (p. 18). The questions to be asked upon successful acquisition include: • What programs and services will be continued? • Is the protection of the financial reserves guaranteed? • Which assets in question will favor the acquiring organization? P a g e | 18 • To what extent will the acquisition affect the employees, clients, and sponsors? Identifying the Prospective Company: The attempt to indentify the potential company should be executed through the development of a “request for proposal” (Lieber & Chase, 2010, p. 18). Lieber & Chase state that in the RFP to be tendered, information should be revealed about the company seeking the acquisition. Of most significant information in the RFP is the reason why the acquisition is sought. Other supplemental information to be disclosed includes the company’s assets, both tangible and intangible. At this stage, stakeholder’s involvements become inevitable as they can provide additional insights as to which company fit the desired profile. Communication with Potential Company: From the initial list of potential companies to be acquired, Liever & Chase (2010) state that meetings should be organized. The sessions will serve as a means to sieve the companies that do not fit the desired profile. According to Liever & Chase, strive to “[n]arrow the pool to a small list of best potential partners” (2010, p. 18). Perform Due Diligence: According to Liever & Chase, a due diligence assessment of the prospective company’s “financial statements, organizational documents, business plans, program statistics, assets, and contracts” should be outsourced to a third party (2010, p. 18). Rozich (2010), in his article states that today, the business world has evolved to be more litigious. In mergers and acquisitions, P a g e | 19 business decisions have also proven tougher due to the regimented intellectual property audit (Rozich, 2010). Companies that want the acquisition deal completed earlier must “purchase an insurance policy that shifts the risk from the acquiring company to the issuing company” (Rozich, 2010). This rigorous nature of businesses today consequentially require that efforts for due diligence be more meticulous. During the process of the due diligence reviews, the acquiring company should tender the following set of regimented questions: • Is the company in concern a good fit? • What are the liabilities and risks? • Is there a likelihood of retaining the prospect’s board members? What role will they perform? • Are there restricted funds on the balance sheet of the prospect company? • Do the prospect company owe any taxes? • Are there any outstanding real-estate taxes? Are they exempted? • Is the prospect company free from any environmental issues? • What are the benefits of the employees? To what degree will they be implemented? • What is the number of employees to be displaced after the acquisition? Have arrangements for COBRA health insurance been made? How many of them were contracted? • Will post acquisition renewals of existing permits and licenses be feasible? In general, are they useable in their preexisting conditions? • In what condition are the prospective company’s accounts receivable? Can collections be made on them? • Is there an existing insurance protection plan on the company to be acquired? • Is there consistency and law conformity from the review of the documents of the prospect company? Final Verdict: P a g e | 20 Upon careful examination of the potential companies to acquire, with the aid of the board, a decision can now be made. It is in this step that a “legal document that sets forth the key term of the transaction” known as the merger or acquisition plan is drafted and approved by both party’s board of executives (Liever & Chase, 2010, p. 19). Contingencies should be set within the acquisition plan to cover any unanticipated terminations or divergence that could arise in the future. A greet and meet session should be conducted amongst employees and boards of the companies involved in the acquisition. The acquiring company should then issue a press release notifying the public of the completed acquisition as according to (Liever & Chase, 2010, p. 19). Post Acquisition Processes Boglarsky (2005), made reference to the conglomeration of the Department of Homeland security, which merged six different agencies in 2002. In order to ensure a successful acquisition or merger, Boglarsky proposes five post procedures to follow: Acknowledge the new entity: In a new merger or acquisition, Boglarsky (2005), states that awareness should exist amongst concerned employees that a new entity will be formed. This will inadvertently lead to the creation of a new and unique company culture. Existing cultures of both organizations in concern will eventually dissipate into the new. The creation of a new entity can be better understood with Hewlett-Packard (HP) acquisition of Compaq. Boglarsky in the article, identifies how management in HP has allowed for a successful integration through cross interaction of personnel from both HP and Compaq’s “engineering, accounting, manufacturing, purchasing, human resources, and research and development” departments (2005, p. 51). This interaction process impacts the business approaches as well as problem solving measures, which P a g e | 21 creates alterations. These alterations consequentially play catalytic roles in the formulation of the new entity. If the acquiring company can take advantage of this synthesized culture and entity, growth and creativity can be propagated towards longevity of the merger or acquisition. Recognize the new vision: Following the acknowledgement of the new entity, identification of a new vision should follow suit (Boglarsky, 2005, p. 51). This process entails the issuance of a new mission statement to the entire company. Its new goals and commitments to stakeholders, employers, and customers need to be guided by this new vision. To ensure a smooth integration amongst departments, their roles have to be re-identified and conform to the direction of the new vision. Management is advised to work diligently as Boglarsky identifies this process to have potentials for rivalry. A “...war room or ‘us vs. them’ attitude – the acquiring company vs. the acquired company or the big company vs. the little company” attitude should not be let to surmount (Boglarsky, 2005, p. 51). An example of a vision that was communicated to the boards and employees from the inception was the case of Aardvark. Aardvark’s vision was to create search content for consumers through the use of social features (Max, 2010, para, 2). Google saw this as a perfect fit for their company as their vision to further promote searches through use of social means was mirrored in the Aardvark Company. Google acquired Aardvark for $50 Million in 2010 (Arrington, 2010, para. 2). Determination of vision: The new vision should be expressed in a clear, concise, and articulate manner. However, it is permissible to make initial vague statements such as “...to become the best newspaper in the P a g e | 22 United States, the fastest package delivery service or the most reliable electricity provider” (Boglarsky, 2005, p. 51). The only disappointment would be not having employees on that caliber that can meet the demands of that vision because of a lack of constructive culture. In the quest to determine the vision and culture direction, Boglarsky mentions that the company should conduct surveys or questionnaires amongst the employees of the acquired company. An apt survey to administer is the “Organizational Culture Inventory Ideal (OCI)”, as it “creates a vision of the culture that the new organization should strive toward to maximize long-term effectiveness” (Boglarsky, 2005, p. 51). Within the results of the OCI Ideal, two employee variations can exist. It can reveal employees that are oriented towards an achievement culture where value is placed on members who perform very well at meeting their set goals. This culture is rich in constructive styles. The other type of employees typifies a culture of affiliation where more of the value is attributed to interpersonal relationships. Management should strive to integrate both types of employees and form a cohesive culture, as they can be provide better corporation, motivation, and quality which are crucial in the attainment of success (Boglarsky, 2005, p. 51). Proper election of new leadership: In handling the merger or acquisition phase, the company should elect new leaders who share the vision of the company and acknowledge the new culture. These new leaders owe it to the company, as one of their duties, to uphold organization standards during the entire process of the merger or acquisition. In the post phase of the completed integration, they should also dictate what direction they intend to steer the organization. “Properly selected leadership, from line managers to executive management, will set in motion the structures, systems, technology and P a g e | 23 training to achieve the vision and ideal culture” as stated by Boglarsky (2005, p. 52). Retained managers from the acquired company who exhibit an ‘us vs. them’ mentality can be revitalized through rigorous team and personal training. In this process, management faces a challenge in forming its new vision and culture as those managers who have not yet adapted to the changes have a tendency to depart from the organization. Measure Success: As a new culture, vision, and leaderships have been identified and defined, it is advisable that the progress thus far be tracked and documented. To ensure that the company is on its intended path to success and to assure its employees and boards that the desired results are being achieved, surveys should be administered. Boglarsky states that these surveys can reveal the company’s strengths as well as its areas of deficiency (2005, p. 52). The strengths can be improved to achieve core competencies and foster a constructive culture and its weaknesses can be addressed to ensure the overall success of the company. Role of Human Resource Management in Mergers and Acquisitions: Economists and venture capitalists are predicting an increase in mergers and acquisitions as the global economy recovers from the worst recession since the Great Depression (Tepedino & Watkins, 2010). Therefore, one would assume that it is now more vital than ever to understand what makes these unions succeed in the long run. Selden and Colvin (2003) stated that 70%-80% of acquisitions fail, meaning that they create no wealth for the share owners of the acquiring company. Evidently, this is a very high percentage; urging companies to carefully analyze the factors that contribute to a successful marriage and to prevent those roadblocks that lead P a g e | 24 companies to failures. Schmidt (2003) has identified five major roadblocks to the success of mergers and acquisitions, the last three of which are human resource management issues: Inability to sustain financial performance (64 percent), loss of productivity (62 percent), incompatible cultures (56 percent), loss of key talent (53 percent) and clash of management styles (53 percent). The last three roadblocks are analyzed below. Incompatible Cultures (Spring-Nextel Merger Failure): Culture is the pattern of norms, values, beliefs, and attitudes that influence individual and group behavior within an organization (Miller, 2000). Oftentimes, companies pay particular focus to the balance sheets and other financial tools before making the deal; however, wise companies will attest to the fact that company cultures play an important role in the success of the union. Take for example, the deal between Sprint and Nextel: “Soon after the merger, multitudes of Nextel executives and mid-level managers left the company, citing cultural differences and incompatibility. Sprint was bureaucratic; Nextel was more entrepreneurial. Nextel was attuned to customer concerns; Sprint had a horrendous reputation in customer service, experiencing the highest churn rate in the industry. In such acommoditized business, the company did not deliver on this critical success factor and lost market share. Further, a macroeconomic downturn led customers to expect more from their dollars.” (Miller, 2000) Miller (2000) states that Sprint saw stiff competitive pressures from AT&T (which acquired Cingular), Verizon and Apple's (Nasdaq:AAPL) wildly popular iPhone. With the decline of cash from operations and with high capital-expenditure requirements, the company undertook cost-cutting measures and laid off employees. In 2008, the company wrote off an astonishing $30 billion in one-time charges due to impairment to goodwill, and its stock was given a junk status rating. With a $35 billion price tag, the merger clearly did not pay off. P a g e | 25 The initial failure of these two companies serves as an example of a cultural clash, and offers a learning opportunity to other companies considering a future merger or acquisition. A lesson learned would be to assess the cultures of both companies at an early stage to ensure a long-term match. The way one company carries out their processes, on a daily basis and at different levels of the organization, may not be the same way another company does it. Most importantly, different cultures may not necessarily represent a broken deal; on the contrary, companies may learn to integrate the top cultural values of each company and effectively make the deal work. Sprint and Nextel might have had a better deal if everyone understood the core values and the decision-making process in each of the companies involved. Loss of Key Talent: Another major roadblock to the success of mergers and acquisitions is the loss of key talent. When any merger and acquisition is announced, the rank and file has a standard reaction: “What's going to happen to my job?” Clear communication and timely integration roadmaps serve to minimize the impact of the deal and keep people focused on the business of running the business” (Mergers & Acquisition Integration, 2010). Aquila (2009) states that one of the key areas companies want to explore, prior to signing the documents, is staffing requirements. Identify the "keepers" up front and let them know on Day One that they are important to the firm. He also suggests that management lay out the organizational charts of both firms and then find out which aspects of each structure are effective, which areas need improvement and which areas should be eliminated. There are always a lot of questions that need to be addressed. It is critical to control external and especially internal communications. P a g e | 26 Clash of Management Styles: The final roadblock to successful mergers and acquisitions, as outlined by Schmidt (2003), is a clash of management styles. According to the human capital and resource dependence theories, having capable senior management in place for mergers and acquisitions is as important as it is for international joint ventures. Effective leadership increases the possibilities of a successful international merger and acquisition. The successful combinations of Ciba and Sandoz or SKB and Glaxo or Nestlé and Purina reflect the priorities and competencies of senior management. In the best firms, human resource policies and practices that support the development of excellent leaders will already be in place long before Stage 1 of a particular merger and acquisition deal. When strong leadership talent is already available, effective retention practices can help ensure that qualified existing managers remain after the merger or acquisition is completed (Negi, 2010). After 39 years of running such businesses as International Paper and DuPont, Mark Suwyn says that the most important lesson he has learned is that it is the people that make a company successful. That is why in January 2005, when Suwyn started working as a contract associate with Cerberus, a New York-based private equity firm, he was surprised to see how little investment banks and private equity firms focused on assessing the workforce of an organization before investing in it. But that is changing now, he says. Today, a growing number of private equity firms and investment banks are realizing that given the risk and large investments being made, they need to assess an organization's talent just as they do the firm's financials. Cerberus takes a three-step approach to its talent assessments. The private equity firm P a g e | 27 uses in-depth interviews, 360-degree reviews and personality tests to assess only the top management (Marquez, 2006). Human Resource Management Guidelines for Successful Merger and Acquisitions According to Marks (1997), human resource professionals should take an active role in educating senior executives about human resource issues that can interfere with the success of the merger and with meeting key business objectives. His work has stated the important role of human capital development to smoothen the transition. The following ways have been described by him: 1. Education of managers and employees To help employees and managers manage stress, low morale and productivity issues in work groups, educational seminars should be developed and delivered to minimize stress and uncertainty in the organization during the merger process. These seminars should focus on specific issues which affect employees rather than on general change management. 2. Development of newly formed teams The merger implementation may lead to problems as new teams are formed. These teams may face interpersonal conflict, unclear roles and responsibilities and confusing procedures as the focus of leaders is on operational tasks. A process needs to be created to develop the newly formed teams. The process needs to be reviewed with managers and supervisors, and consultation should be provided. 3. Reinforcement of the new culture When two organizations with very different cultures merge, the management should be helped to preserve the best aspects of the old company and to carry them into the new P a g e | 28 company. What cultural characteristics and values senior executives want to preserve from their respective companies should be understood along with understanding what they don't want to keep and what new characteristics they want to introduce in the new organization. A list should be made and each level of management should be asked for feedback. Management should be provided with a development tool. All levels of management should be surveyed about three months after the merger, to assess progress toward the new culture and feedback should be provided to managers. All in all, for a successful deal to take place it is important for human resource managers to be active, accessible, and positive. In being active, human resource managers should speak in terms of numbers and metrics so that the rest of the company understands their importance in the merger and acquisition. In being accessible, during a merger and acquisition is no time to take vacations. It is important to be available to the new management, peer group, and subordinates and employees. Finally, while being positive, remind everyone that there are tasks to accomplish and make sure people are focused on their jobs and have less time than usual for gossip and speculation. Case Examples of Acquisitions Acquisition of Lucent by Alcatel French based Alcatel acquired the American based Lucent in 2006 to form the telecommunication giant Alcatel-Lucent. Prior to the merger, the two companies were major competitors catering to a vast number of customers and vendors needs for software systems and telecommunications equipments. And as such, efforts involving a 2001 merger plan proved futile P a g e | 29 (Brown, 2006, para. 6). Sources revealed that the role of the controlling company, upon a merger, could not be decided (Brown, 2006, para. 6). The November 30, 2006 merger created a $36 billion aggregate market capitalization as according to Bernier (2006, para. 1). In this union, Alcatel remains the larger of the two with a market value of $22 billion compared to Lucent’s $12.6 billion (Brown, 2006, para. 7). However, Wallace (2006) mentioned that the negotiations preceding the merger called for equality amongst the two technology gear giants (para. 5). The headquarters would also remain in Paris. The main motives behind the Alcatel-Lucent merger were primarily to increase in size and achieve economies of scale. Specifically, Alcatel, with intentions to expand its market share abroad, perceived Lucent as a beneficial source to enter into the Atlantic region’s code division multiple access (CDMA) wireless network equipment supply (Brown, 2006, para. 8). The CDMA technology is the one mostly favored in the United States as evident in the support of the major wireless communication service providers –Sprint Nextel, Verizon Wireless, Virgin Mobile, and MetroPCS. In integrating Lucent into Alcatel, the chairman and CEO of Lucent, Patricia Russo would become the new CEO of Alcatel-Lucent (Bernier, 2006). According to Bernier, “Russo will lead a communications powerhouse with revenue of $25 billion and 88,000 employees worldwide that is expected to touch off a series of M&A action by major telecom equipment manufacturing, possibly including Ericsson, Nortel Networks Ltd. and Siemens” (2006, para. 2). P a g e | 30 The chairman and CEO of Alcatel at the time was Serge Tchuruk, who was appointed the post of nonexecutive chairman after the merger. Tchuruk issued a statement about the strategic operations of the newly formed AlcatelLucent saying, “[w]e are committed to moving forward aggressively after closing and quickly combining our operations and integrating our corporate cultures to ensure that we capture the full benefits of this combination for our customers, our shareowners and our employees" (Wallace, 2006, para. 6). Alcatel-Lucent announced that their new firm, within the third year of their merger should attain cost synergies of up to $1.7 billion before taxes (Bernier, 2006, para. 4). The feasibility of such a feat would stem from executive decisions to: unify functions within the new establishment that are interdependent; optimize chain of supply; restructure procurement procedures; leverage research and development (R&D) and services; and reduce its 88,000 employees worldwide by 10% (Bernier, 2006, para. 4). Today, Alcatel-Lucent has had a change in its leadership as Ben Verwaayen replaced former CEO Russo. In its strive to continue as a global leader in the telecommunications market, Alcatel-Lucent has been the subject of several joint ventures and six acquisitions primarily in North America (“Alcatel-Lucent History-Looking Forward”, para. 5). Hewlett-Packard merge with Compaq Overview P a g e | 31 In this next case example we will be examining the 2002 merger between HewlettPackard and Compaq. Carly Fiorina was the presiding CEO of HP and the chief initiator of the plan to merge with Compaq. The merger was a massive $25 billion stock acquisition initiated by HP, and it resulted in a total reorganization of both companies overlapping Personal Computers, Server Computers, and Services departments. Originally met with criticism and internal oppositions; the case is a unique example of a large merger that initially struggled to achieve its intended effect, but ultimately transformed into one of the most important mergers in HP's history (Sorkin and Norris, 2001, pg 1). Hewlett-Packard and Compaq Decide to Merge: The reasons given for merging the two computer giants were fairly straightforward, but realistically much more complicated and risky. The desire to boost sales in the PC and Server markets was the primary strategic goal behind the merger; the idea was to rapidly grow HP's PC, server, and services departments by merging them with Compaq's existing similar departments. It was therefore a decision based more on the need for growth then the need to acquire more technology. However as we will discuss in more detail later on in the paper, such a move to rapidly expand an existing department comes with great risk and uncertainty. A brief look at the numbers helps illustrate HP's rational for the merger. In 2001 HP reported revenues of $47 billion from all its operations, while Compaq posted revenues of $40 billion that same year. HP and Compaq both faced a major industry rival (as well as each other before the merger) in the form of IBM and its massive $90 billion in revenue for that same year. Combining the two revenue streams of both HP and Compaq would yield a theoretical $87 P a g e | 32 billion in revenues (Sorkin and Norris, 2001, pg 1). Thus HP's goal wasn't just to increase the size of its departments, it really was aiming to improve its ability to compete with IBM. Obstacles and Difficulties The massive merger between HP and Compaq (as previously noted) was not approved without first engaging a number of opponents to the merger who feared that it carried to many risks and would take the company in the wrong direction. The merge was heavily criticized from the start, "Wall Street raised eyebrows about the wisdom of the consolidation as soon as plans for it were disclosed three years ago" (The HP Compaq, 2004, Par 3). Additional criticism came directly from within HP itself; Hewlett-Packard director Walter Hewlett was a major internal opponent to the merger, saying "HP can't out-Dell Dell and out-IBM IBM at the same time" (Kawamoto, 2002, par 12). Hewlett was worried about the danger of diluting the market and losing company focus. HP was traditionally a technology company with a strong printer and cartridges division, however as one analyst noted after the merger that, "H-P remains heavily dependent on imaging and printing systems. These operations accounted for 31% of corporate revenue and 74% of total operating profits in fiscal 2003, while services contributed 17% of total sales" (The HP Compaq, 2004, Par 3). The statistics show that even after the merge the company's focus barley changed, and it was this slight change that Hewlett was criticizing as being wasted time and money (noting that HP still couldn't compete with IBM even after the merger). The other hurdle was purely one of execution, HP and Compaq were both large companies and there was concern that there would be difficulty in integrating the two P a g e | 33 overlapping companies and their corporate cultures (we will later note how HP addressed this problem). Results and Lessons Learned Under Carly Fiorina the merger was heavily criticized and tepidly executed, ultimately failing to meet expected growth in PC and Server sales. While Fiorina did an excellent early job of planning for integration by setting up a 1,500 employee department dedicated to integration planning between the two companies, she failed to maintain elements of the department for long term planning (LaPlante, 2007, par 6,8). Mark Hurd, who replaced Fiorina as CEO in 2005, managed to improve the company and attain its original goals of competing in the pc market by, retraining management to focus on cost and operational efficiency. This improved overall margins and finally fulfilled the mergers original goals of improving growth rates in the consumer pc department. Overall there were three big lessons to learn from HP's early mistakes. First Long-term strategy failed to address customers concerns and questions about the new company. Second, there was an over estimated growth expectation for the consumer PC market; we as a group believe this might have been an internal mistake caused by an attempt to sell the merger to skeptical investors. Finally the last and perhaps most important lesson learned was that a company should never declare and early victory (HP disbanded their integration team after the merger), mergers are an ongoing affair and a part of the new companies corporate culture (LaPlante, 2007, par 13) P a g e | 34 Delta Northwest Airlines Merger Delta Airlines chief Richard Anderson recounts building the world's largest airline during the worst down cycle in living memory. In September 2007, Delta embarked on a merger with Northwest Airlines. This merger created the world's largest carrier in terms of traffic, with more than 80,000 staff and a fleet exceeding 700 aircraft. Delta was not spared from the massive financial bleeding all carriers endured in 2009, posting a $2 billion loss as the top 150 global carriers hemorrhaged roughly $7.8 billion. But Delta continues to march towards its goal of achieving $2 billion in synergies from the merger in 2011, projecting $1.5 billion in annual merger synergies by the end of 2010. "This was not a top down strategy. This was really a bottom-up integration process, where you let the real experts have their way with the decision making process... and we drove the process on a daily, hourly basis, just about." says Anderson "The biggest challenge in any merger of this size is technology," Anderson explains. Legacy airlines in particular have less flexible mainframe applications and data integration is key. Delta deliberately tested the technology and related business processes, says Anderson. "We had no [meltdowns] and we planned to have no massive meltdowns." Anderson believes Delta was successful in dissolving any competitive concerns about the merger, saying those worries "have wholly failed to materialize". But consolidation alone cannot fix the industry's chronic revenue degradation. A recurring theme expressed by Anderson and other members of Delta's management is de-levering its balance sheet, with the carrier's stated goal of reducing its net debt from current levels of roughly $15.6 billion to $10 billion by 2012. P a g e | 35 Anderson stresses the importance of creating a viable business model that serves employees, communities and investors. "Our equity shareholders deserve the kind of returns on capital that a highly capital intensive business requires," he says. Despite this praise, Anderson is not concerned about big competitors, Continental and American, introducing the 787 before Delta, explaining that Delta's wide body strategy, he stresses the carrier has 167 transoceanic aircraft with an average age of 11 years, including 10 777-200LRs with more range than the 787 Delta is contributing to that fierce competition by attempting to seize London Heathrow slots that the one world carriers were required to relinquish. It has proposed year-round daily flights from Boston and Miami to Heathrow to put a dent in one world’s Heathrow edge. Describing execution of the Northwest merger, Anderson talks about taking decisions "early, quickly and definitively". "You need to have a couple of billion dollars in synergies to make sure your business plan is going to be viable in any environment” Anderson’s focus on strengthening Delta's global network through SkyTeam is balanced by an impending historical union election after the government altered 85-year-old representation guidelines. Now unions can get representation by winning the majority of votes cast, rather than endorsement from the majority of employees in a specific work group. More than 21,000 Delta flight attendants and roughly 30,000 ground workers are voting or preparing to vote for union representation (Ranson, 2010). Passenger service workers at Delta Air Lines Inc. begin voting Nov. 2 on whether they want to be in a union reports WSJ. The company created comprehensive answers and transparent information feed about the merger and integration timeline on their web site. They encourage you to comment and/or question the occurring transition. Company wants to make sure P a g e | 36 customers continue to have " seamless flying experience " and shareholders to know Delta's progress. We've merged Northwest reservations and booking functions into Delta's. So as of Jan. 31, 2010, all flights are Delta flights (with a Delta code) and nwa.com has been retired. Customers will be redirected to delta.com to book flights, manage itineraries and for all other online activities. Delta and Northwest are currently flying under a single operating certificate from the Federal Aviation Administration, operations at airports worldwide have been integrated and the combined airline is working on a single reservation system. In October 2009, the Northwest WorldPerks loyalty program integrated into the SkyMiles program. And, we have integrated our flight schedules and policies for a consistent customer experience. Pre-merger Northwest aircraft are still being painted in Delta colors.(Delta and Northwest Merger The Basics FAQs). It's hard to believe that nearly two years have passed since Delta acquired Northwest but now, finally, the mega-merger of these two carriers is almost complete. Delta stands to reap major financial benefits from full integration. The airline estimates it took in $700 million in merger benefits last year, and could top $2 billion after a few years of operating as a single, unified carrier. According to the WSJ, "As one airline, it can eliminate duplicate technology platforms and consolidate scheduling systems for pilots. It also will be able to better manage its inventory of seats, more easily shifting planes and crews to wherever they are needed." (Unger, 2010) Tata & JLR Acquisiton Tata Motors which is part of the Tata Corporation, the largest private cooperation in India, is India’s largest automobile company. It’s also the world’s fourth largest truck P a g e | 37 manufacturer and the second largest bus manufacturer. With their domination in the Indian market, Tata Motors want to have a footprint in the international market as well. They have operations in different countries such as South Korea, Thailand, and Spain. They also have a strategic alliance with Fiat. (Tata Motors, 2008) However, the company decided to take their international approach a step further. In 1989, Ford Motor Company bought Jaguar for $2.5 billion dollars. In the year of 2000, Ford Motor Company also bought Land Rover for $2.7 billion dollars. In 2008, Tata Group Cooperation bought both Jaguar and Land Rover for $2.3 billion dollars on a cash free, debt-free basis. The purchase consideration includes the ownership by Jaguar and Land Rover or perpetual royalty-free licenses of all necessary Intellectual Property Rights, manufacturing plants, two advanced design centers in the UK, and worldwide network of National Sales Companies. (Neff, 2008) As part of the deal, Tata will continue to receive supply from Ford with powertrains, stampings, in addition to a variety of technologies such as environmental and platform technologies. Ford will also provide engineering support, research and development, information technology, accounting and other services. (Neff, 2008) In addition to all these services, Ford Motor Credit Company will provide financing for Jaguar and Land Rover dealers and customers during a transitional period which can be up to 12 months depending on the market. (Neff, 2008) Ford and Tata both believes that these arrangements will help support Jaguar and Land Rover’s current position and develop its own capabilities for the future. (Tata Motors, 2008) Speaking about the agreement, Mr. Ratan N. Tata, Chairman of Tata Sons and Tata Motors, said: P a g e | 38 "We are very pleased at the prospect of Jaguar and Land Rover being a significant part of our automotive business. We have enormous respect for the two brands and will endeavor to preserve and build on their heritage and competitiveness, keeping their identities intact. We aim to support their growth, while holding true to our principles of allowing the management and employees to bring their experience and expertise to bear on the growth of the business." (Tata Motors, 2008) Tata Motors believes that it could take two luxury car companies that are not doing so well in the market and turn it into two very profitable companies. They have decided to keep Mr. David Smith, the acting Chief Executive Officer of Jaguar Land Rover, as the main man running the business. Mr. Smith who spent 25 years of experience with Jaguar Land Rover and Ford would be the best fit to continue to carry the company to a better more successful future. Mr. Smith said expressed his pleasure with working with the Tata group and that he is looking for a bright future for the company and its stakeholders. It’s believed that under the new owner, Tata, Jaguar and Land Rover will continue to improve. (Tata Motors, 2008, Par 8) Jaguar Land Rover's employees, trade unions and the UK Government have been kept informed of developments as the sale process progressed and have indicated their support for the agreement. However, short after Tata acquired Jaguar and Land Rover the financial crisis hit the ground. The global automotive sector has been negatively affected by the collapse of the global financial sector, lack of access to credit and working capital, and increase in the gas prices. The affect is most obvious with the collapse of two of the three major U.S. car makers that filed for bankruptcy. 2008 was very tough for Tata Motors when operation profits declined by 51%. With this declined, Tata still posted a net profit of $218 million. (Annual Report, 2009) The global slowdown had significantly impacted on the Jaguar Land Rover Company. Sales of Jaguar declined by 20% and sales of Land Rover declined by 51% from October 2008 to March 2009. (Annual Report, 2009) P a g e | 39 Worldwide the sales of cars have decreased by 5% compare to the year of 2008, mainly sales in U.S., Europe, and Japan by around 16%. On the other hand, the Chinese market of domestic car has grown by 7%. Tata Motors implemented new strategies to increase the sales of Jaguar and Land Rover. The company understood that the market in the United States and in Europe has slowed down; therefore, they directed their focus in different emerging market such as China and India. They have also focus more in Russia and the Middle East. Tata Motors realized that the two British icons need to retain their identity; design and technical independent, their image in the world, while at the same time integrate with Tata Motors management to find synergies in the capabilities and facilities. Tata Motors as a company is very aware that a high level of technology and skills embedded in JLR would benefit both sections. Some of those technologic development programs are the development of hybrid power train which will be in the new models of Jaguar and Land Rover. Lightweight aluminum bodies is another change that Tata will implement on the Jaguar and Land Rover new models which will lead to savings in weight and reductions in CO2 emissions. (Annual Report, 2008) "We are confident that they are leaving our fold with the products, plan and team to continue to thrive under Tata's stewardship. Now, it is time for Ford to concentrate on integrating the Ford brand globally, as we implement our plan to create a strong Ford Motor Company that delivers profitable growth for all." (Tata Motors, 2008) Exxon Mobile Merger P a g e | 40 The oil industry is one of the biggest and most profitable industries with more than 50% of volume internationally traded. Like most industries, the oil industry has been forced to adjust dramatically to the changes in technology, globalization, industry transformations, and entrepreneurial innovations. Due to these factors, many oil companies decided to join and work together to be more efficient and more profitable. And the biggest merger of all was the merger of Exxon and Mobil. According to William J. Baer, Director of the FTC's Bureau of Competition: “The Exxon/Mobil merger is the largest industrial merger ever. It would create the largest private oil company worldwide and the largest U.S.-based company of any type.” (Review of Exxon-Mobil, 1999) ExxonMobil merger announced in 1998; and completed in November of 1999. This merger was encouraged by both industry and company specific factors. Company specific factors planned in response to many factors that affected both the industry and the economy as a whole. These factors include first the oil price shocks and instability. In 1998, oil prices declined to $9 a barrel. Companies had to increase efficiencies so that they can reduce their breakeven price to the range of $11 to $12 per barrel. Also, improving earnings stability through geographic diversity and combining gained markets, improve combined financial and business performance, and increase returns generated by combined assets. Assets will enable ExxonMobil to gain stronger oil and gas discovery potential through combining their assets and be in a better position to invest in programs with high risks and high returns. Eliminate excess capacity and duplicate facilities and combine administrative costs. P a g e | 41 One of the biggest reasons the two big companies joined together is to enhance competitive advantage of the industry. The merger of the first biggest oil company in the United States with the second one was a big event in history. Some of the industry-related changes that foster merger and acquisitions include the globalization of markets, the development of intermediate markets along the value chain, the fall of barrier to entry and the emergence of specialized firms, intensified competition, changing dynamics of the financial markets, lower transaction costs due to reduced cost of information, technological changes. ExxonMobil financial performance had improved significantly after merger. Total revenue increased from $184,753 Million in 1999 to $246,738 Million in 2004. Total income and assets also increased during that same period. ExxonMobil will be enjoying even better revenue with the dramatic increase of oil prices during recent years. ExxonMobil might be considering an oil pipe dream of merger with British Petroleum (BP) (Exxon-Mobile Merger, The merger deal was on target and increased the value of both companies. Conclusion Overall this paper has examined a number of the essential phases of and examples of mergers and acquisitions. We covered several case examples such as; Alcatel-Lucent, HPCompaq, Delta-Northwest, Exxon-mobile, and Tata's acquisitions of Jaguar and Range Rover. These examples have all shown that while all merges and acquisitions follow a similar path, no two mergers are alike. As you can see from our research there are heavy drivers that encourage companies to enter into Merger and Acquisition transition. They are: buying growth and assets, increasing value of the company in comparison to standalone value, broadening customer base “buying” customers, growing market presence and market share, achieving economies of scale P a g e | 42 and scope, cost cutting, establishing international operations and international presence, acquiring technology, knowledge, trade secrets, new lines and brands. The list can go on since as American companies are pressured to report increasing revenues, improvements in assets and overall growth. But when choosing acquisitions and/or mergers as the way to grow businesses should remember that it is an inorganic way of expanding that puts a lot of strain on original business and it's culture. P a g e | 43 References Alcatel-Lucent History Looking Forward. (n.d.). Retrieved October, 20, 2010 from Alcatel-Lucent Web Site: http://www.alcatellucent.com/wps/portal/AboutUs/Overview/ Aquila, A.. (2009, November). The missing piece in mergers. 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(2003), M&A Needn't be A Loser's Game, Harvard Business Review, 81 (6). Sikora, M. (2002, February). A dark mood in the M&A market with a few rays of hope. Mergers and Acquisitions, 37(2), 4-9. ABI/INFORM Global (Document ID: 109535691). Sorkin, Andrew Ross, and Floyd Norris. "Hewlett-Packard in Deal to Buy Compaq for $25 Billion in Stock - NYTimes.com." The New York Times - Breaking News, World News & Multimedia. 04 Sept. 2001. Web. 29 Oct. 2010. http://query.nytimes.com/gst/fullpage.html?res=9C02E7DE1739F937A3575AC0A9679 C8B63 Tata Motors - Media Centre. Tata Motors - HomePage. 2 June 2008. Web. 29 Oct. 2010. http://www.tatamotors.com/our_world/press_releases.php?ID=370&action=Pull Tata Motors Annual Report 2009 - Asiaing.com: Free EBooks, Free Magazines, Free Magazine Subscriptions. Tata Motors Annual Report 2009. Asiaing.com, 1 Dec. 2009. Web. 29 Oct. 2010. http://www.asiaing.com/tata-motors-annual-report-2009.html Tata’s Jaguar Acquisition and Ferrari Ride. 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(Document ID: 2048814761). and from The Exxon - Mobil Merger Controversy | Business Strategy Case Studies | Case Study in Business, Management." Case Studies | Case Study in Business, Management, Operations, Strategy Case Studies. 25 Sept. 1999. Web. 29 Oct. 2010. http://www.icmrindia.org/casestudies/catalogue/Business Strategy2/Business Strategy The Exxon-Mobil Merger Controversy.htm The H-P Compaq Merger Two Years Out: Still Waiting for the Upside. Knowledge@Wharton. 20 Oct. 2004. Web. 21 Oct. 2010. http://knowledge.wharton.upenn.edu/article.cfm?articleid=1053 Unger, C. (2010, January 6). Delta-Northwest Merger Nearing Completion. Retrieved from http://www.smartertravel.com/blogs/today-in-travel/delta-northwest-merger-nearingcompletion.html?id=4077294 Wallace, B. (2006, November 20). Alcatel, Lucent Get Final Approval, Plan to Begin Integration Efforts. Retrieved October 19, 2010 from http://www.von.com/news/2006/11/alcatel-lucent-get-final-approval-plan-to-132220.aspx Weston, Fred. The Exxon-Mobil Merger: An Archetype. Rep. The Anderson School at UCLA, 2 Feb. 2002. Web. 29 Oct. 2010. http://www.anderson.ucla.edu/faculty/john.weston/papers/exxonmerger.pdf. Yamanouchi, K. (2010, October 13). “Delta lags in on-time rate: Atlanta-based airline among worst for delays and cancellations.” The Atlanta Journal - Constitution, p. A.13. Accounting & Tax Newspapers. (Document ID: 2160587931) Zofnass, J.P. (1998). The new environment for consolidation.” Civil Engineering, 68(10), 80-83. ABI/INFORM Global. (Document ID: 35111204). Selling to the Government : Best Prospects for Small Entrepreneurial Firms Page 1 International Management Summer B Professor J. Haar Selling to the Government: Best Prospects for Small Entrepreneurial Firms Prepared By: Andrew Hussey Cecilia Jimenez Juan Diego Membreño Table of Contents Selling to the Government : Best Prospects for Small Entrepreneurial Firms Page 2 Introduction - Why Sell to the Government? ...................................................................... 3 Department of Defense (DoD) - Brief Information ........................................................... 4 Laws, Rules, Restrictions/ Limitations ............................................................................... 5 Confidentiality and Security ............................................................................................... 7 Small Businesses Programs ............................................................................................ 8 Contracting Methods & Bidding Procedures .................................................................... 12 Contracts ........................................................................................................................... 15 General Services Administration - GSA ....................................................................... 16 Advantages and Disadvantages of Selling to the Government ......................................... 17 Effects of Political Change ............................................................................................... 18 Best Prospects for Small Businesses Entrepreneurs – By Industry .................................. 19 Other Government Trends ................................................................................................ 21 CASES AND SUCCESS STORIES: ................................................................................ 23 Rose Wang &Binary Consulting Inc. ........................................................................... 24 Lurita Doan & New Technologies Management Inc. ................................................... 24 Turkish Firms Using DoD Procurement Programs ....................................................... 25 Bavarian Nordic – Denmark, Biopharmaceutical Company ........................................ 25 Steps to Consider .............................................................................................................. 26 Difficulties ........................................................................................................................ 28 Foreign Firms and US Government Contracts.............................................................. 30 Strategies and Final Recommendations ............................................................................ 31 Conclusion ........................................................................................................................ 32 REFERENCES ................................................................................................................. 34 APPENDIX ....................................................................................................................... 38 Selling to the Government: Best Prospects for Small Entrepreneurial Firms Selling to the Government : Best Prospects for Small Entrepreneurial Firms Page 3 Introduction - Why Sell to the Government? Selling to the United States government is a multi-billion dollar market – per year. The size of this market cannot be given a specific monetary value, due to the fact that every year, the U.S. government spends more money than it did in the previous year. Trends are showing that government spending increases every year sometimes by as much as ten to twenty percent. Back in the mid-1980s, selling to the government was roughly a $30 billion per year market (Black 1989). Since then, government spending has increased more than ten fold. This is especially apparent in the defense segment of the government. The United States government will not hesitate to spend whatever it needs to satisfy the wants of its defense, regardless of how much it stands to lose or gain. With a market this big, there is no end to the opportunities that exist for the small business man or woman. This paper will focus on the opportunities that exist for disadvantaged small entrepreneurial firms who would like to sell to the government and touch on what would be required for such a firm to do so. The thought of having the government as a consumer of these small disadvantaged businesses seems like an awkward situation, but it provides for much of the growth of these small firms, both domestic and foreign. [See Definition in Appendix for Small/Disadvantaged/Minority Firm] Selling to the Government : Best Prospects for Small Entrepreneurial Firms Page 4 Department of Defense (DoD) - Brief Information The United States Department of Defense, created in 1949, is the executive department of the government that watches over everything involving or relating to national security and the military (DoD “About DoD” 2007). Its headquarters is the Pentagon, located in Arlington County, Virginia. The DoD has more than 5 million employees, most of which are military personnel, others high ranking officials and civilians. The DoD is comprised of many agencies and organizations. To name a few of the agencies that make up the DoD, there is the Department of the Army, Department of the Navy (which includes the United States Marine Corps), the Department of the Air Force, Coast Guard, Department of Traffic (DOT), and the Department of Homeland Security. These are just a few of the many agencies that work together under the DoD. Probably the most interesting thing to those interested in this document is that IBM Corporation and the Department of Defense have been recognized for their support and use of small businesses outside of the government (McCrea 2003). Another reason for mentioning the DoD is that it consumes a large portion of the government’s budget to finance its operation. The DoD encourages the use of small businesses whenever possible. This business is contracted, and a minimum percentage of these contracts must go to these small businesses. With the current war situation, the DoD’s budget has been increasing rapidly. The U.S. has been at war with Iraq since 2003. In 2005, the Department of Defense’s budget was estimated to be $402 billion (DoD “Office of Management and Budget” 2005). This estimate does not account for some research, weapons testing, and design. In 2006, the budget was $425 billion. In late-October 2006, the President raised the Selling to the Government : Best Prospects for Small Entrepreneurial Firms Page 5 defense budget for 2007 to $532.8 Billion (Garamone 2006). In just two years, the defense budget increased roughly 30%. Since last year alone, this is a 25% increase (an additional $107 Billion). Again, this is just to show that the government will not hesitate to spend whatever it feels is necessary when it comes to its defense. There are a lot of things going on right now – with the war overseas, the heightened state of security after September 11th 2001, there are so many jobs/chores that need to be taken care of. Even with the large workforce of the government, there are just too many things that need to be done for these individuals to take on additional chores with their other responsibilities. The government certainly has the money, so why not use it and hire others to take on these assignments and help out business for others? Laws, Rules, Restrictions/ Limitations Procurement and acquisitions by the government are regulated by the Federal Acquisition Regulations found in Chapter 1 of the Code of Federal Regulations (CFR) and maintained under the authority granted to the Secretary of Defense, Administrator of General Services and the Administrator, National Aeronautics and Space Administration (FAR 1.000). The FAR is amended and revised as needed by a council made up of the Defense Acquisition Regulations Council (DAR Council) and the Civilian Agency Acquisition Council (CAA Council) and published by the General Services Administration (FAR 1.04). DoD procurement is further governed by the Defense Federal Acquisition Supplement (DFARS) found in Chapter 2 of the CFR (DFARS 2.101). The public may propose changes to FAR and DFARS by issuing a memorandum, Selling to the Government : Best Prospects for Small Entrepreneurial Firms Page 6 in a specific format contained in the FAR, which is then published for public comment and reviewed by the attendant councils (FAR 1.501-2). General certification requirements exist under these two guidelines with the possibility for additional requirements by branch of the DoD. Under the Office of Federal Procurement Policy Act (41 U.S.C. 425), any new certification requirements must be imposed by statute or be submitted in writing to the Under Secretary of Defense for Acquisition, Technology and Logistics (USD(AT&L)) and approved by the Secretary of Defense (FAR 1.01). Section 203.7001 of the DFARS requires that a contractor’s system of management controls provide for (1) a written code of business ethics and conduct and a training program for all employees in these subjects; (2) periodic reviews of company business practices, procedures, policies, and internal controls for compliance with standards of conduct and the special requirements of the government; (3) a mechanism by which employees may report any suspected instances of improper conduct; (4) internal and external audits; (5) disciplinary action for improper conduct; (6) timely reporting to appropriate government officials of suspected or possible violations or irregularities in connection to government contacts; and (7)full cooperation with government agencies responsible for investigative or corrective actions. Contractors with DoD contracts worth $5 million or more must display DoD Hotline Posters prepared by the Inspector General unless the company establishes its own hotline and actively encourages employees to use it to report improper conduct or irregularities or the contract is to be performed oversees (DFARS 252.203-7002). Selling to the Government : Best Prospects for Small Entrepreneurial Firms Page 7 The Anti-Kickback Act of 1986 (41 U.S.C. 51-58) makes it illegal for subcontractors to make any kind of direct or indirect payments to prime contractors in exchange for favorable treatment in connection with a prime contract. Violators risk a halt in payment of money owed to the subcontractor, criminal penalties and lawsuits by the government to recover civil penalties 41 U.S.C. 51-58 (FAR 3.502-2). Each company with a prime contract of over $100,000 must institute the same kinds of training and reporting practices as in the general contractor requirements of the DFARS, but with a concentration on kickbacks. Employees must also annually declare the gifts and gratuities received from subcontractors. Inconsistencies in contractor cost accounting practices led to the establishment if the Cost Accounting Standards Board to create a more consistent, uniform basis for negotiating and administering fixed-price and cost-type procurement contracts. Though not a set of rigid rules, the CAS does create a system of options for the measurement of costs, assignment of costs to cost accounting period, and the allocation of cost to cost objectives (CAS 48 CFR 9903.302-1). Confidentiality and Security Because contracts with the government, in particular the DoD, are often matters of national security, the DFARS has severe restrictions on what kind of information may be disseminated by contractors. Contractors may not release to anyone outside the organization even unclassified information, regardless of medium, that pertains to the contract or any program related to the contract. (DFARS 204.404-70(a)). The only exceptions are if the information is already in the public or domain or the contractor Selling to the Government : Best Prospects for Small Entrepreneurial Firms Page 8 submits a request for approval, in writing and 45 days prior, to the Contracting Officer specifying the information to be released, the medium to be used, and the purpose for the release (DFARS 204.404-70). Contractor employees approved for the Top Secret (TS), Special Access Program (SAP), or Sensitive Compartmented Information (SCI) must orally attest that they will conform to the conditions and responsibilities imposed by law or regulation on those granted access (DFARS 204.404-70). Small Businesses Programs The Small Business Reauthorization Act of 1997 increases the overall government-wide procurement goal for small business from 20% to 23% and increased funding for the Defense Loan & Technical Assistance (DELTA) program to be administered by the SBA to qualifying businesses effected by defense spending cuts (SBRA 15 USC 631 note). The DoD’s goals for small business contracts stand at 23% for prime contracts and 35% for subcontracts, with $219.3 billion in prime contracts and $121.5 billion in subcontracts awarded to small businesses in 2005 (DoD OSBP Executive Summary). The DFARS states that contracting officers shall give consideration to tiered small businesses (HUBZone small businesses, service-disabled veteran-owned small business, women-owned small businesses, etc) unless the contracting officer performs marketing research and determines that the agency’s needs cannot be met by a small business (DFARS 219.201). All small businesses must qualify under the requirements of the Small Business Administration size standards, which vary based on industry and specific area of business. For instance, a farm must have below $750,000, while fishing operations must have less than $4 million, and steam-and-air conditioning supply companies must have less than $11.5 million (13 CFR part121). Selling to the Government : Best Prospects for Small Entrepreneurial Firms Page 9 Some, like HUBZone and Small Disadvantaged Businesses must get official certifications from the SBA in order to qualify for DoD Small Business Programs. To that end, the Department of Defense has several Small Business Programs. The Mentor-Protégé Program pairs small, disadvantaged businesses with large companies in individual, project-based Agreements. The Agreements specialize in environmental remediation, engineering services, information technology, manufacturing, telecommunications, and health care and have become integral to many of the Mentors’ sourcing strategies (“OSBP Program Overview” 2007). The Protégé1 companies develop their business and technical capabilities while creating long-term business relationships. The Small Business Innovation Research Program (small technology firms) and Small Business Technology Transfer Program (small firms working with an educational institution) offer up to $850,000 ($1 billion annually between them) to small companies engaged in early-stage R &D that will result in products that will fill DoD or have a commercial purpose (“OSBP Program Overview” 2007). Funding is awarded on a competitive basis and the companies retain intellectual property rights to innovations created under this program. • • • • • 1 An SDB concern as defined at 219.001, paragraph (1) of the definition of "small disadvantaged business concern," or A qualified organization employing the severely disabled as defined in Section 8064A of Public Law 102172, or Small business concern owned and controlled by women as defined in Section 8064A of Public Law 102172, or Service-disabled veteran-owned small business as defined in Section 8(d)(3) of the Small Business Act (15 U.S.C. 637(d)(3)), or HUBZone as determined by the SBA in accordance with 13 CFR part 126. Selling to the Government : Best Prospects for Small Entrepreneurial Firms Page 10 The Indian Incentive Program offers prime contractors a 5% rebate on work or products subcontracted to Native American organizations (“OSBP Program Overview” 2007). The Woman-owned Small Business Program aims to reach the DoD’s goal of having 5% of prime contracts or subcontracts awarded to woman-owned and controlled businesses (“OSBP Program Overview” 2007). All DoD subcontracting plans are required to have a separate goal for awards to these businesses, with a focus on effective outreach, training and technical assistance. The Historically Black Colleges and Universities and Minority Institutions Technical Assistance Program provides technical assistance to minority institutions on the Department of Education's annual listing of Accredited Postsecondary Minority Institutions (“OSBP Program Overview” 2007). The Comprehensive Subcontracting Plan Test Program authorizes the negotiation, administration, and reporting of subcontracting plans on a plant, division, or companywide basis in an attempt to determine whether comprehensive subcontracting plans increase the number of small businesses contracting with the government (“OSBP Program Overview” 2007). Eligible large prime subcontractors (those who in the previous year have performed 3 DoD contracts totaling at least $5 million and have a SDB contracting rate of over 5%) allow the DoD to oversee and plan their subcontracting for them. There are two programs for veterans which use set-asides—the regular VeteranOwned Small Business Program and the Service-Disabled Veteran-owned Small Business Program –which court small businesses owned by veterans and the spouses/caretakers of severely and permanently disabled veterans and conducts market research on how to further include those businesses in prime and subcontracts (US Selling to the Government : Best Prospects for Small Entrepreneurial Firms Page 11 “Executive Overview” 2007). The DoD in concert with the SBA also participated in the Historically Underutilized Business Zone (HUBZone) Empowerment Contracting Program, which provides contracting preference to U.S.-citizens-owned businesses located in HUBZones2 and with 35% of its employees also living in the HUBZone. The DoD’s goal is to award 3% of prime contracts to HUBZone businesses, which will be partially achieved through the use of set-aside contracts (US “Executive Overview” 2007). Finally, the DoD encourages the use of Small Disadvantaged Businesses (SDB) and 8(a) businesses. These businesses must be certified by the SBA, and in the case of 8(a) businesses, be active in the Business Development Plan for 9 years (US “Government Contracting” 2007). SDB & 8(a) businesses are likely to take part in the Mentor-Protégé program due to the assistance and guidance they receive from the SBA and they also qualify for some set-asides (“OSBP Program Overview” 2007). 2 As defined by the SBA, a "HUBZone" is an area that is located in one or more of the following: • • • a qualified census tract (as defined in section 42(d)(5)(C)(i)(I) of the Internal Revenue Code of 1986); a qualified "non-metropolitan county" (as defined in section 143(k)(2)(B) of the Internal Revenue Code of 1986) with a median household income of less than 80 percent of the State median household income or with an unemployment rate of not less than 140 percent of the statewide average, based on US Department of Labor recent data; or lands within the boundaries of federally recognized Indian reservations. Selling to the Government : Best Prospects for Small Entrepreneurial Firms Page 12 DoD Program Goals for 2007 Small Business Category Prime Contracts 23% Subcontracts 35% HUBZone 3% *** Service-Disabled Veteran-Owned Small Business 3% 3% 5.8% 5% Women-Owned Business 5% 5% Historically Black Colleges & Universities/Minority Institutions**** 5% 5% Small Business Small Disadvantaged Business* * Includes 8(a) *** HUBZone subcontracting program does not require a DoD-wide goal but requires the negotiation of HUBZone goals in all DoD contracts and subcontracts that require "Small Business Subcontracting Plans." **** Defense Components are not required by DoD to establish separate HBCU/MI subcontracting targets. Instead these awards should be included when developing the subcontracting targets for Small Disadvantaged Business. Contracting Methods & Bidding Procedures Contracts worth less than $3,000 are not advertised and qualify for the Micropurchases policy, which means that contracts are equally divided among qualified suppliers on the government contractor list and payment may be made using government purchasing cards (FAR 13.202) Contracts between $3,000-$25,000 are also not advertised nationally, though they are sometimes advertised locally and solicitations are oral or in the form of a Request for Proposal, are usually reserved for small businesses, and are governed under the Simplified Acquisition Procedures (US “Government Contracting” 2007). Contracts between $25,000 and $100,000 are advertised on the FEDBIZOPPS website, solicited orally or through RFQ, qualify for SAP, and reserved for small business set-asides. Contracts over $100,000 are also advertis...
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Running Head: FOSSIL FUEL AND ALTERNATIVE SOURCES OF ENERGY

Can Alternative Energy Compete Effectively Against Fossil Fuel? Which are the Best
Name
Date
Institution

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FOSSIL FUEL AND ALTERNATIVE SOURCES OF ENERGY.
Introduction
Fossil fuels are fuels formed from fossils; that is, buried remains of plants and animals
millions of years ago. Fossil fuels include coal, crude oil, and natural gases. Due to
decomposition, fossils have very high levels of carbon in them (Denchak, 2018). The world has
been dependent on fossil fuels for centuries, which have played a significant role in
modernization. Fossil fuels are used to propel cars, power businesses, light homes, and many
other general uses. The uses of fossil energy are endless. As much as there are advantages to
fossils as a source of energy, there are also disadvantages. Fossil fuels have massive
disadvantages and may end up doing more damage than good. Energy from fossils is obtained
through burning. Thus, the carbon in them is released into the atmosphere affecting the climate.
The fossils take too long to form, and increased demand makes the sources more deplete, and
since it is not renewable, there will be little left to sustain the whole world with time. This issue
has resulted in the idea of researching alternative sources of energy which is clean and
renewable.
Background
Fossil fuels produce about 80% of the energy used in the world. With increasing
industrialization, the energy demand has risen significantly, and thus, more fossil fuel is needed
to satisfy the market. Today in the United States, each person consumes an average of one
million kilojoules of energy. Human beings have become entirely dependent on power, and the
needs increase with time. The uses range from the health sector, transport and communication,
industrial, social welfare, and necessary human activities such as cooking, comfort, and heat. In
general, energy has made life more comfortable and has become a necessity. However, for

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FOSSIL FUEL AND ALTERNATIVE SOURCES OF ENERGY.
centuries, the world has depended on fossils as the primary source of fuel, which has resulted in
significant challenges in the environment and the risk of depletion of fossil energy.
One of the problems seen with fossil fuels that have pushed people to consider finding a
different source is the effect fossil fuels have on the environment. The first issue is oil spills,
which happen from time to time. Spills that occur in the ocean and seas cause the death of many
animals that live in water. After an oil spill, fish, turtles, sharks, and other sea animals are seen
floating on water dead (Denchak, 2018). Oil floats on water and thus prevents these animals
from breathing by covering oxygen. Also, the spills affect food production for these animals,
causing them to starve. When these oil spills happen on land, they affect the plants and even
people in the area. The oil flows to rivers, which ends up polluting the water. Also, oil leakages
are dangerous since many people in the surrounding areas are likely to be affected if a fire
occurred. To save these animals and the environment, it is essential to seek other alternatives that
are clean, safe to use, and just as useful (Union of Concerned Scientists, 2017).
The other problem is that fossil fuels are non-renewable. Fossil fuels are mined deep
below the earth's surface. This source of energy is naturally occurring and takes millions of years
to form. With the increasing energy demand, more and more supply is needed to satisfy the
needs. However, with time the existing sources will be depleted, leaving a considerable energy
gap, considering that over 80% of the energy used worldwide is acquired from fuels. It would be
unimaginable to live in such a world. Therefore, other alternatives have to be the sort to ensure
the world does not rely that heavily on fossil fuels. In this case, the main aim is to find sources
that are renewable and can offer the same contribution as fossil fuels.
Another concern is environmental pollution through emission. As said earlier, energy
from fossils is obtained through burning. As they are rich in carbon dioxide, much of it is

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FOSSIL FUEL AND ALTERNATIVE SOURCES OF ENERGY.
released into the atmosphere affecting weather patterns and global warming. With increased
usage, more and more carbon is being released into the atmosphere, contributing to the
greenhouse effect. As a result, weather patterns and seasons have changed massively.
Temperatures are expected to rise even higher and get colder during colder seasons. The
situation is dire, and every day, we make it worse. Therefore, it is high time we consider a
change for our benefits.
Renewable sources of energy are energy acquired from natural sources through natural
processes. Some of the sources include; solar, wind, hydropower, geothermal, ocean power, and
bioenergy. These are some of the renewable and clean energy sources that researchers are
considering in replacing fossil energy. The problem is that they are still being produced at a very
minimal amount, and not much effort has been put to effect these changes. However, this is an
urgent issue that needs to be dealt with since saving the environment means saving human
beings.
Statement of the Challenges, Problems, or Opportunities
Current Situation

Most energy, 80% of the total around the world, is supplied by fossil fuels. In comparison,
the other 20% is acquired from other sources such as wind, hydropower, solar energy, ocean
energy, and geothermal sources (Kåberger, 2018). Despite there being many alternative sources,
many countries have only put in a little effort to change even with these new alternatives. The
world is heavily reliant on fossil fuels, and their needs keep increasing instead of reducing due to
industrialization. Energy cannot be destroyed but can only change form. Since fossil fuels are
composed of too much carbon, they release the carbon into the atmosphere when fossil fuels are

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FOSSIL FUEL AND ALTERNATIVE SOURCES OF ENERGY.
burnt. Despite the advantages of fossil fuels to industries, homes, and development, the adverse
effects that accrue overtime are more significant than the benefits gained.

Effects on climate changes and the environment are not irreversible, but the best way to
mitigate climate change is finding alternative energy sources. In this case, the world is full of
choices, but the original is supposed to be renewable, sustainable, and in plenty to take up the
existing gap filled by energy obtained from fossils (80% of world energy). Energy from fossil
fuels has been running around the world since the age of industrial power. It started with coal,
then with time, all others found uses, and most systems around the world were created to fit this
energy's services.

The diagram below shows the greenhouse gas emissions levels for each source of energy.
On the left side, there are renewable sources, which all, in general, have very minimal carbon IV
oxide emitted to the atmosphere, with the least being wind energy and hydro energy. To compete
against fossil fuels, the pollution differences would be a huge selling point for these alternative
sources. The world is currently slowly changing and adopting these new systems that use
renewable energy, which has minimal pollution effects and reduces global warming emissions.
However, fossil fuels all together are still used massively, and the transformation process is taking
forever.

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FOSSIL FUEL AND ALTERNATIVE SOURCES OF ENERGY.
Graph of the Greenhouse Gas Emission Lifecycle

Coal

Coal is found in a solid that exists in different types; anthracite, bituminous, subbituminous, and lignite. Coal is mined from underground through mining and getting the
deposits from down below. The United States provides over a third of its electricity using coal
energy. For coal to produce energy, it is burnt and emits high levels of carbon into the
atmosphere. Apart from air pollution, coal mining is dirty, resulting in detrimental effects on the
surrounding environment. Trees are uprooted around coal mines. Removing soils from
underground alters the soil layers and affects the entire ecosystem. When the mines are
exhausted, miners move on to a new area leaving the mines degraded and of no use. The United

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FOSSIL FUEL AND ALTERNATIVE SOURCES OF ENERGY.
States has plenty of coal, but due to increased awareness of the environmental effects and
embracing the alternative measures, coal industries have continued closing down. Another
reason that has contributed to the closing down of coal mining has other sources that are
renewable and more efficient.

Oils

Crude oil (petroleum) is a fossil obtained in the form of liquid made up of hydrocarbons.
This liquid is found deep in the earth's crust and is obtained through drilling on land or at sea.
After extraction, the crude oil is taken to refineries, where it is separated to get gasoline,
kerosene, diesel propane, jet fuel, and other products. This component is the most used type of
fossil and is transported worldwide in trucks, trains, supertankers, and pipelines. Most of these
products are used to support vehicle movement and in industries. In other words, these products
drive the world's economy. An example today is when the prices of oils fo high, it triggers an
increase in commodities and transport prices. This act is a clear indication that if the oils were to
deplete or there was a shortage, the whole world would be in a crisis. Also, increased industrial
growth may result in a lack of fossil energy due to rising demand. Oils also pollute the
environment since the energy obtained from them requires combustion. The smoke and carbon in
them are released into the atmosphere.

Natural Gases

The natural gas's main component is methane, found in porous and permeable rock beds,
and is obtained through drilling and fracking. The United States has been the world's top
producer of natural gas and a massive consumer of the same. In the US, natural gas is used in

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FOSSIL FUEL AND ALTERNATIVE SOURCES OF ENERGY.
electricity production and, in general, provides 30% of the total energy in the country. Study
shows natural gases have contributed massively to air and water pollution, and its application is
likely to increase soon all over the United States. Like other fossil energy sources, natural gases
are non-renewable and thus not sustainable.

The problem and why it matters

The problem with fossil fuels, in general, is pollution and the risk of depletion. Since
industrialization, most of the facilities, machinery, and equipment are created using only fossil
energy, thus rendering the world dependent on fossils up to date. Fossil fuels take millions of
years to form since they depend on the collection, decay of plants and animals over time. Not all
dead and decayed material from fossils, and thus, there is not much of it forming to replenish the
used-up sources. Fossil fuels produce energy using combustion, which then releases hydrogen
carbons into the atmosphere. If the carbon released were in small quantities, it would not cause
much harm, but a lot of it is released into the atmosphere daily. Some of the effects caused by
fossil fuels are; land degradation, water pollution, air pollution, and global warming effects.

Land degradation

Fossil fuels are found in bedrock deep within the earth's crust, accessed by drilling and
mining processes. The mining, processing, and transporting of coal, oils, and gases affect the
ecosystem and the landscape massively. The waste generated in processing activities is disposed
of in water and on land resulting in pollution. Mining also results in the destruction of the earth,
where vegetation has to be cleared in the area, and soil layers' natural occurrence is disturbed.
This act also makes it hard for the region to replenish new fossil fuels as the land lacks nutrients

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FOSSIL FUEL AND ALTERNATIVE SOURCES OF ENERGY.
and will take years to reform. The other issue is after fossils mining activities are completed in
the area, the land is left useless, destroyed, and polluted. It is rendered unproductive and
inhabitable due to polluted water bodies and the waste left on the ground. These actions are a
significant risk to human beings and animals in the surrounding areas. In most cases, people and
animals move away from such sites, and since vegetation is cleared, there will be no chances of
decay within the area, at least not enough to form fossil fuels in millions of years from now.

Water pollution

One of the worst threats caused by fossil fuels is the massive water pollution seen. Waste
from processing industries is deposited in nearby water bodies. The rest is left of the ground and
is washed away by rain to water bodies as well. Thus, almost all the waste ends up in water
bodies. When it comes to transportation also, water is used to transport fossil fuels all over the
world. Therefore, when there is spillage in the ocean, the substances, especially oils and other
toxic fluids, are left floating on water. They contaminate drinking water and limit the air supply
in water, which ends up killing many animals that live in water. Coal mining activities result in
many unwanted acids that end up in rivers, lakes, and oceans. These activities, therefore, lender
the waters unsafe for consumption or for water animals to survive. Thus, most are poisoned and
die in large numbers, and fish become unhealthy for human consumption. Therefore, fossil fuel
spills are a threat to human and different species' existence. Thus, fossil fuels do more harm than
good, and this fact is slowly coming to light even if it is too late since the consequences are
already being felt.

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FOSSIL FUEL AND ALTERNATIVE SOURCES OF ENERGY.
Global warming effects

Energy from coal, natural gas, and oils is obtained through burning. In this process, fossil
fuels emit massive amounts of carbon dioxide to the atmosphere. Besides human health, fossil
fuels also emit a lot of carbon dioxide during combustion in the atmosphere. These gases have
formed a layer within the atmosphere that allows heat but not out. Therefore, this layer traps
gases, heat within the atmosphere down such that there is no outlet. This act has resulted in to
increase in heat on the earth's surface, causing the greenhouse effect. Therefore, any gases
emitted into the atmosphere adds to the layer forming in the atmosphere. Mining operations also
result in the clearing of forested areas and afterward leaving the land bear. These activities end
up affecting the weather and climate cycle all over the world.

Air pollution

In processing facilities, fossil fuels undergo combustion to be refined, releasing harmful
gases into the atmosphere. Therefore, people living in regions where oil refinery occurs are
exposed to these toxic gases, and it slowly takes a toll on their health. Some gases, such as
formaldehyde, are linked to causing cancer, and benzene is linked to blood disorders and a
massive contributor to childhood leukemia. However, the world is dependent on fossils as a
source of energy. Thus, people tend to ignore this fact. Another concern has been carbon
monoxide and nitrogen oxide, which are poisonous to animals and human beings. These gases
are mainly produced by cars...

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